The Effect of Public Subsidies on Innovation Investment Decision of Enterprises Based on Mean Variance Model Analysis

Abstract

— Based on the quadratic utility function and mean variance assumption, an innovation project investment decision model is established. In the model, innovative enterprise can choose to invest in innovative or non-innovative project. Enterprise manager is decision-maker, he determines the optimal level of effort and allocates his funds to innovative or non- innovative projects with the goal of maximizing the expected utility of investors, which is equivalent to maximizing the sharp ratio of the enterprise. It can be proved by the model that the amount of investment in innovative projects increases and the scope of investment can expand because of public subsidies. The investor will allocate more capital to innovative enterprises in that public subsidies increase the rate of return of innovative enterprises.